The Redistribution of Wealth – McCain Style

John McCain is fond of saying that Barack Obama wants to “share the wealth”. By this he means that Barack’s tax plan is unfair and that it will result in taking money from the wealthiest people in America (like John McCain) and giving it to the less wealthy (like you and me). He and Sarah Hockey Puck then go on to rant about Socialism and Europeans, etc. There is little doubt that one of the fundamental causes of the current economic meltdown is “no rules” Capitalism – the sort that John McCain, George Bush, Ronald Reagan, and Alan Greenspan have advocated over the past thirty years. There is, however, a deeper underlying factor that has led to the financial horrors that many Americans are now facing: it is the 401(k) plans that so many of us have come to depend upon.

The term 401 (k) refers to a particular section of the U.S. Internal Revenue Service code. The groundwork for our present 401 (k) system was initiated in 1978 when the IRS allowed employees to not pay tax on deferred income. However, it was not until 1981 when Ronald Reagan was President, that the IRS allowed salary deductions to go directly into a 401(k) account without any tax being paid on the contribution. This was the beginning of a massive injection of new funds into the U.S. stock market – investments that were being made by ordinary U.S. citizens, i.e. amateur investors. If you look at a chart of the Dow Jones average for the past hundred years you will see many interesting features. One of these is the spectacular climb in the Dow between 1925 and 1929 – probably something Alan Greenspan would call irrational exuberance. You might also notice that after the stock market crash in 1929 that the Dow did not return to its peak of 380.330 until 1954, twenty five years after the crash. A strong period of growth begins in the middle of World War II as U.S. factories supply arms to most of the world. This growth continues throughout the recovery period after the war until about 1966. We then enter an ocillatory period of about fifteen years of essentially no growth in the Dow. Then we come to 1982 and some companies begin providing 401 (k) options to their employees instead of defined benefit pension plans (in defined benefit plans the company guarantees you a specific retirement income, and the company assumes all the risk of providing your pension). By 1984 there was almost $94 billion in 401(k) funds invested in the stock market. By 1990 there is almost $385 billion of 401 (k) money in the stock market. By 1996 there is about $1.06 trillion of 401 (k) money in the market. In 1998 there is $1.54 trillion. By 2002 there is $1.8 trillion. By 2003 there is $1.9 trillion. Based upon these numbers we might expect the total value of 401 (k) contributions invested in the stock market today to be about $4 trillion dollars. If we look at the total loss in the U.S. stock market capitalization since the market peaked almost exactly a year ago we see that the market has lost about $7 trillion dollars in value.

This is another way of saying that your 401 (k) wealth has been shared – probably in a way that John McCain approves of. A lot of the experienced investors bailed a year ago when they saw the meltdown coming. These experienced investors are mostly the wealthy or the analysts who work for the wealthy. They have sold at the top, or near the top, and have pocketed an amount equal to a bit more than the total amount of 401 (k) investments in the market.

Wanna play “share the wealth again”? John McCain has another great idea for you: how about instead of the government providing you a “defined benefit pension plan” i.e. Social Security, you just invest all your Social Security contributions in the stock market – just like a 401 (k)? Pretty good idea, huh?

If you look back at the chart that shows the performance of the Dow for the past hundred years you can see that beginning about 1998 the growth in the market – probably due largely to the injection of funds from 401(k) accounts – has slowed down and we get into a “double bubble” economy. First we have the tech bubble, then the housing bubble as people chase temporary increases in stock value. It looks like the 401 (k) accounts are no longer a big enough annual contribution to continue to automatically propel the economy upward – which of course explains why John McCain wants to put your Social Security money in the stock market and provide another great injection of funds into an otherwise tired stock market. It’s all part of Johnny’s plan for sharing the wealth.

The thing is that neither Johnny nor George Bush give a hoot about why Social Security exists in the first place. It was created during the Great Depression after people got wiped out in the stock market crash of 1929 and then found that when they reached retirement age they had absolutely no income. Social Security is there to protect the average person from the avariciousness of the wealthy who would try to entice the innocent worker to gamble their life savings on the stock market. These scrooges have already been successful in doing this with the creation of the 401 (k) plans and now they want to do more of this by privatizing Social Security. John McCain and the rest of his wealthy cronies are not against wealth redistribution, in fact he and they have always been very active proponents of it -it’s just that it is your wealth that they want to share, not theirs.

Come to think of it, they’ve been pretty successful at it too, haven’t they?

3 Responses

[…] If you look at a chart of the Dow Jones average for the past hundred years you will see many interesting features. One of these is the spectacular climb in the Dow between 1925 and 1929 – probably something Alan Greenspan would call …[Continue Reading] […]

On the surface, your argument makes a lot of sense. But where I think it breaks down is that the value of stocks after the large sell-off has come back. So, for those that stay in the market, the values of their share came back. So, where does that ‘value’ come from? From those that sold early, as you put it. That money is put back into the market b/c it is used to buy other shares and propel the market back up again.

But, I certainly agree that the market, on average, is used to separate amateur investors (i.e. the poor) from their money.

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